Latest / WTR Small-Cap Spotlight / WTR Consumer Monthly — When the Bar Is on the Floor: Finding Value in Small-Cap Consumer's Most Beaten-Down Names

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WTR Consumer Monthly — When the Bar Is on the Floor: Finding Value in Small-Cap Consumer's Most Beaten-Down Names · WTR Small-Cap Spotlight

• 0:01
  SPEAKER_01: Welcome to the WTR Small Cap Spotlight Podcast.
• 0:04
  SPEAKER_01: I'm your host, Tim German, vice chair and co-founder and chief marketing officer of Water Tower Research.
• 0:10
  SPEAKER_01: Today I'm joined by my colleague Doug Lane, managing director and an analyst on our consumer team at WTR.
• 0:16
  SPEAKER_01: Doug just released the May edition of his consumer monthly titled When the Bar is on the Floor, The Snapback Trade and Small Cap Consumer.
• 0:25
  SPEAKER_01: Doug, nice to have you on the podcast today.
• 0:27
  SPEAKER_01: Good to be here.
• 0:27
  SPEAKER_01: Thanks, Tim.
• 0:28
  SPEAKER_01: So let's start things out with the big picture.
• 0:31
  SPEAKER_01: What does this month's consumer monthly cover?
• 0:34
  SPEAKER_01: Why does the title feel so fitting right now as well?
• 0:37
  SPEAKER_00: Yeah, thanks, Tim.
• 0:38
  SPEAKER_00: This month we're really focused on a pattern we've been observing in the historical record for small and mid-cap consumer names.
• 0:45
  SPEAKER_00: Stocks that spend months grinding towards multi-year lows, then they surge sharply on better than feared results.
• 0:51
  SPEAKER_00: We're calling it the snapback trade.
• 0:53
  SPEAKER_00: And the May Monthly looks at names where that has already played out.
• 0:56
  SPEAKER_00: And then we take a look at what uh has happened fundamentally at several companies that we cover and find themselves broadly in similar circumstances.
• 1:04
  SPEAKER_00: So, along with that, we also include our standard look at how the WTR Consumer Index has been performing.
• 1:10
  SPEAKER_00: We have a currency analysis section that's important given the fundamental nature, the global nature of many of these firms, and our fundamental focus, which this month is a deep dive on Helen of Troy, which is one of the latest examples of this knockback trade in action.
• 1:26
  SPEAKER_01: I'm curious at a really high level what the WTR consumer index is actually telling investors about the health of the sector right now.
• 1:33
  SPEAKER_00: What's in the headline is that consumer stocks recovered nicely in April.
• 1:38
  SPEAKER_00: In April, our index was up 8.9% for the month, but that followed a 9.8% plunge in March, tied to escalating tensions in the Middle East.
• 1:47
  SPEAKER_00: So on a year-to-date basis through April, the WTR consumer index is up 1.7%, which sounds okay.
• 1:54
  SPEAKER_00: But then when you compare it to the SP small cap 600, uh it that's up 13.7% year to date.
• 2:00
  SPEAKER_00: So even in our best performing sub-index, we have six sub-indexes within the broader index.
• 2:05
  SPEAKER_00: Uh, the best performer was outdoor and leisure, but even that one was only up 8.5%, still trailing the broader benchmark SP 600 small cap.
• 2:14
  SPEAKER_00: And so behind the numbers, it's really a sentiment story.
• 2:17
  SPEAKER_00: It's it's it's not an earnings story.
• 2:19
  SPEAKER_00: The earnings actually have outperformed in the index so far versus the SP small cap 600, but the multiples contracted.
• 2:27
  SPEAKER_00: So we've seen uh a 0.35x contraction in the perspective multiple of our index versus an expansion in the multiple of the SP small cap 600.
• 2:36
  SPEAKER_00: So um, while we've had the better earnings, the sentiment change is what's really driving the underperformance.
• 2:43
  SPEAKER_00: So, really, so far, the fundamentals aren't as bad as the markets pricing in, at least not yet.
• 2:48
  SPEAKER_00: But the macro narrative is weighing heavily here.
• 2:50
  SPEAKER_00: You know, we take a look at the, as everybody does, the University of Michigan Consumer Sentiment Index.
• 2:55
  SPEAKER_00: Uh, it fell to a preliminary reading of 48.2 in March, in May, which is already a record low.
• 3:02
  SPEAKER_00: But since our report was published last week, it was revised even lower to 44.8.
• 3:06
  SPEAKER_00: And that's the lowest official monthly reading on the record since the survey was started in 1952.
• 3:12
  SPEAKER_00: So when you have those kind of headlines, it makes it hard for investors to get constructive on consumer names, even when company level results are holding up better than feared.
• 3:21
  SPEAKER_01: Yeah, I'm I completely concur with that analysis.
• 3:24
  SPEAKER_01: Uh, interestingly, very early this morning, Bloomberg was reporting on the sentiment plummet as well.
• 3:28
  SPEAKER_01: It is uh troubling at best.
• 3:30
  SPEAKER_01: So if we move on, uh Doug, let's turn to your currency work.
• 3:33
  SPEAKER_01: I know you include a detailed currency analysis every month.
• 3:36
  SPEAKER_01: What are the key takeaways right now, and how does it affect the companies you cover?
• 3:41
  SPEAKER_00: Yeah, I mean, in in the consumer space, a lot of these companies are very global, particularly the direct sellers, which have, you know, 80% of their business or more outside the US.
• 3:50
  SPEAKER_00: So currency lately has been largely a tailwind, but it's been a split analysis, really.
• 3:55
  SPEAKER_00: If you look at um the the the currencies that are doing the best against the dollar, you're talking about the Mexican peso, the Brazilian Real, the Aussie dollar, and they have been very strong against the US dollar.
• 4:07
  SPEAKER_00: But um, and and we're and we expect them to continue for the year.
• 4:11
  SPEAKER_00: I mean, they were very strong in the first quarter.
• 4:13
  SPEAKER_00: That might have been the high watermark, but we do expect the favorable tailwinds from those currencies to hold.
• 4:18
  SPEAKER_00: Um, but on the other hand, we have Asian currencies like the South Korean wand, the Indian rupee, the Indonesian rupiah, and the Philippine peso that have been weakening.
• 4:27
  SPEAKER_00: So you would think, I mean, that would be good for companies to source out of Asia, but with all the tariff cross currents, it's really not really dropping to the bottom line.
• 4:35
  SPEAKER_00: So uh it's a little bit more complicated when you have tariffs factored into the equation.
• 4:40
  SPEAKER_01: Agreed.
• 4:40
  SPEAKER_01: Um, so now on to your fundamental focus section.
• 4:43
  SPEAKER_01: You chose Helen of Troy NASDAQ ticker symbol, H E L E this month.
• 4:48
  SPEAKER_01: I'll add the caveat that I was not personally terribly familiar with the company name.
• 4:52
  SPEAKER_01: However, as soon as I went to their website, the light bulb went off immediately.
• 4:56
  SPEAKER_01: Most of our listeners likely own one or more of their products to include a Hydro Flask water bottle.
• 5:01
  SPEAKER_01: Um, this is a company that's been through a rough stretch.
• 5:04
  SPEAKER_01: Walk us through what is occurring there and why you found it worth a deeper dive, Doug.
• 5:09
  SPEAKER_00: Yeah, no, it it does have a lot of well-recognized brands.
• 5:12
  SPEAKER_00: Once you go to their website, they have licensed brands, they have owned brands, and everybody's heard of them and probably has them in their medicine cabinet or in their kitchen or somewhere in the house.
• 5:20
  SPEAKER_00: Uh, but the reason I chose the stock is because it's a perfect case study for the dynamic we're talking about.
• 5:26
  SPEAKER_00: Um, they came into 2026 trading near multi-year lows in the mid-teens, market cap of about 340 million against the trailing revenues of 1.8 billion.
• 5:35
  SPEAKER_00: Uh, there is deep skepticism about whether management could restore growth.
• 5:39
  SPEAKER_00: And let's talk about these brands.
• 5:40
  SPEAKER_00: We're talking about OXO.
• 5:41
  SPEAKER_00: You mentioned Hydro Flask, Osprey, they license VIX, uh, they have Honeywell Home, uh, Dry Bar.
• 5:49
  SPEAKER_00: There's a lot of good brands in here.
• 5:51
  SPEAKER_00: Um, but the past couple of years, we've seen CEO turnover, massive non-cash goodwill impairments, uh, tariff-related supply chain disruptions.
• 6:00
  SPEAKER_00: They do a lot of sourcing in Asia.
• 6:02
  SPEAKER_00: And then these are discretionary items.
• 6:04
  SPEAKER_00: You don't need to have to buy a hairdryer every year, every month.
• 6:06
  SPEAKER_00: So you've got a lot of things working against the company.
• 6:09
  SPEAKER_00: Uh the four-year sales dropped 6.4% in EPS last year, dropped from$717 the prior year to$355.
• 6:17
  SPEAKER_00: So these are big declines.
• 6:19
  SPEAKER_00: Um, but the fourth quarter, they're on a February fiscal, but the fourth quarter changed the narrative.
• 6:24
  SPEAKER_00: Adjusted EPS of 83 cents, beat consensus of 75.
• 6:28
  SPEAKER_00: Operating cash flow was 111 million, dramatically stronger than the prior year's 35 million.
• 6:34
  SPEAKER_00: And the new CEO reframed the outlook, describing fiscal 2027 this year as a pivotal growth first mindset.
• 6:41
  SPEAKER_00: And so um, you know, he's got a concrete plan to reduce China tariff exposure, uh, looking for net sales uh growth this year, uh, and uh reducing China exposure to be 20% of cost of goods.
• 6:55
  SPEAKER_00: So there was a lot of good news in that, and it came unexpectedly.
• 6:58
  SPEAKER_00: So the stock surged in pre-market trading, uh, and and and uh that's the kind of dynamic we're talking about with the snapback snapback trade.
• 7:08
  SPEAKER_01: Understood.
• 7:09
  SPEAKER_01: So that naturally leads us to the consumer commentary section this month, the snapback trade more broadly.
• 7:14
  SPEAKER_01: What is the template and what are the implications for the rest of your coverage group?
• 7:18
  SPEAKER_00: Well, fundamentally, as demand softens and tariffs bite, consensus earnings estimates get repeatedly cut and expectations compressed to the floor.
• 7:28
  SPEAKER_00: Then any evidence of operational resilience, a modest revenue beat, a margin tick up, a credible cost plan triggers a violent short covering and re-rating event.
• 7:37
  SPEAKER_00: And I mentioned Hell of Troy, but that's just the most recent example.
• 7:41
  SPEAKER_00: We saw the same dynamic in lifetime brands where shares where shares surged in March and April on earnings upside, driven by improved profitability.
• 7:50
  SPEAKER_00: Not even a top line beat.
• 7:51
  SPEAKER_00: It was just improved profitability as all these cost-cutting measures are beginning to be reflected in the bottom line.
• 7:57
  SPEAKER_00: Before that, you had Beach Body, which posted its 10th consecutive quarter of positive adjusted EBITDA, and is showing that a real restructuring, this company has really changed its stripes, transitioning away from a traditional MLM model towards a direct-to-consumer and affiliate-based business.
• 8:13
  SPEAKER_00: And so then they actually produced earnings at a company many had written off.
• 8:17
  SPEAKER_00: And again, the macro backdrop is amplifying this.
• 8:21
  SPEAKER_00: After not doing anything for a couple of years, the SP small cap earnings growth has re-accelerated.
• 8:27
  SPEAKER_00: And uh the the consensus is for double-digit EPS growth for the small cap 600 in 26 and 27.
• 8:34
  SPEAKER_00: So, you know, investors are looking for uh willing to reward early evidence of recovery in previously beaten-down names.
• 8:42
  SPEAKER_00: So let's look at some of our names we we go over in the report.
• 8:45
  SPEAKER_00: You know, something like Culp Industries.
• 8:47
  SPEAKER_00: Stock is down sharply over the past years, demand trends are quite soft, but management has outlined over 20 million in annualized cost savings from a multi-phase restructuring.
• 8:57
  SPEAKER_00: And the CEO has indicated that restructuring is now largely complete.
• 9:01
  SPEAKER_00: So the question is whether volume recovery materializes, particularly in the mattress cycle, and when those cost actions are fully reflected in the results.
• 9:10
  SPEAKER_00: You know, also in furniture, we have Basset Furniture, where uh it's in the housing and furnishing space, and but consensus EPS implies about a 35% improvement from the prior year, and longer EPS gross estimates are around 16%.
• 9:24
  SPEAKER_00: And so the housing market continues to be weak for sure, but you've seen pent-up demand continuing to build.
• 9:31
  SPEAKER_00: So, you know, we don't know when the cycle's going to turn.
• 9:35
  SPEAKER_00: It is a cyclical business, uh, but clearly visibility on the timing remains limited.
• 9:40
  SPEAKER_00: But it's something that you know we're following very closely.
• 9:43
  SPEAKER_00: And also in the furniture space, Miller Knoll had a difficult quarter.
• 9:47
  SPEAKER_00: The stock dropped in March after results missed on sales, partly due to geopolitical demand disruptions.
• 9:53
  SPEAKER_00: But they did report revenue growth, they did report gross margin expansion, they are reducing operating costs, so the bar's been set lower.
• 10:00
  SPEAKER_00: So again, you know, it's a it's a cyclical business, so we'll see how it goes.
• 10:04
  SPEAKER_00: Uh, but there's actions being taken behind the scenes that abode well for future results.
• 10:11
  SPEAKER_01: Oh God, I'm sorry.
• 10:12
  SPEAKER_00: Yeah, I have a couple other ones too.
• 10:14
  SPEAKER_00: I mean, outside of the furniture space, we have 800 flowers.
• 10:17
  SPEAKER_00: Uh they realized there were 50 million in cost savings ahead of schedule, and now they're targeting another 15 to 20 million next year.
• 10:25
  SPEAKER_00: Revenue is still under pressure.
• 10:27
  SPEAKER_00: Uh, there's a direct-to-consumer business, and search algorithms are being uh are being affected by um you know AI impacting organic traffic and the companies prioritizing profitability over top-line growth from a marketing perspective.
• 10:42
  SPEAKER_00: But they did beat the second quarter uh uh uh of they they reported a dollar twenty against an 86 cents estimate.
• 10:50
  SPEAKER_00: So some of these cost uh efforts are being beginning to fall to the bottom line.
• 10:56
  SPEAKER_01: It's a very compelling framework, uh Doug and uh Helen of Troy is uh is a great illustration of how fast sentiment can turn when expectations are low enough.
• 11:04
  SPEAKER_01: So thanks for walking us through the May Consumer Monthly.
• 11:07
  SPEAKER_00: Yep, thank you, Tim.
• 11:08
  SPEAKER_00: I appreciate it.
• 11:09
  SPEAKER_01: Thank you for listening, and don't forget to subscribe, as well as visiting www watertowerresearch.com to stay up to speed on the company's small cap written research reports, podcasts, fireside chats, industry specific symposiums, and conference schedules.
• 11:25
  SPEAKER_01: We will see you next time for another edition of the WTR Small Cap Spotlight Podcast.
• 11:31
  SPEAKER_01: Finally, a special thanks to the producer and editor of the podcast, Krista Fitzpatrick.